Which are the winning and losing companies in the FTSE reshuffle?

The quarterly rebalance of the FTSE 100 takes place today – but which stocks will be promoted and which will be demoted?

The final FTSE reshuffle of 2017 will be based on this evening’s closing prices and it looks like Just Eat, DS Smith and Halma will be promoted to the FTSE 100 at the expense of Merlin, ConvaTec and Babcock.

Russ Mould, investment director at AJ Bell, said: “It has been a relatively quiet year for the FTSE 100 index as a whole, amid historically low volatility, with these three changes taking the total for the year to just nine.

“For the year as a whole, the entry of Scottish Mortgage Investment Trust and Just Eat, for example, highlight investors’ ongoing hunger for growth stories. Halma’s promotion is a deserved reward for dependable earnings and dividend growth while the return of both Segro and Berkeley showed how commercial and residential property remain central to the UK’s economic fortunes.

“The relegation of Capita, Hikma, Dixons Carphone, ConvaTec, Merlin and Provident Financial shows how the market is in no mood to tolerate earnings disappointment.”

Just Eat

The Share Centre said Just Eat’s share price has doubled since its flotation in 2014. Last week its takeover of rival HungryHouse became official and the £200m deal will enable the company to benefit more independent restaurants and improve the offering for customers.

“With increasing numbers of people shopping and ordering online, it was really only a matter of time until a company like this reaches the top index,” said Helal Miah, investment research analyst at the group.

Mould added: “The firm (has) a market cap of £5.6 billion, bigger than each of Marks & Spencer, Sainsbury’s and Morrisons. This shows how the internet places a focus not just on price but on service and Just Eat’s success is testimony to its ability to harness the power of both technology and consumer satisfaction. The asset-light model relies on partners and word of mouth (customer reviews) as well as its scalable platform in a great example of how the internet can be used to create a powerful and profitable business model.

“Analysts expect the company to generate pre-tax profit of £137 million in 2017, up from £91 million in 2016. This is well below the £576 million, £549 million and £376 million expected of M&S, Sainsbury and Morrisons (on an adjusted basis) for their current financial years. They may be more profitable but Just Eat is valued more highly as the market takes the view it has the superior growth prospects – though with Deliveroo, UberEATS and Amazon Restaurants snapping at its heels, to name just three, Just Eat also operates in a fiercely competitive market place.”

DS Smith

Plastic packaging company DS Smith was founded in 1940. The Share Centre said the group is a leading provider of corrugated and plastic packaging in 25 countries and has experienced excellent sales and earnings growth in recent years, due to strong online retailing where cardboard packaging is widely used to transport products.

Miah said: “Its prominence is likely to have been boosted as we enter the busy Christmas shopping period. Recent updates also pointed to the fact that acquired businesses have made solid progress and the group therefore expects to deliver on all five of its medium-term financial targets.”

Mould added: “DS Smith has a substantial overseas presence that minimises the impact of Brexit and brings benefits in the form of a weak pound, while it can also point to a track record of consistent earnings and dividend growth.

“The company’s elevation to the big league follows that of packaging peer Smurfit Kappa in December, as both firms ride the online shopping boom and consolidation within the industry.

“DS Smith does not offer premium dividend yield relative to the FTSE 100, at 2.8%, but the company did unveil its ninth consecutive increase in its annual shareholder payout alongside its full-year results in June and history shows that those firms capable of consistently growing their dividend over time provide the best total returns to investors.”

Halma

Mould said hazard detection and life protection products producer Halma has kept dividend investors happy: “This month’s 7% increase in its first-half dividend also holds out the prospect of Halma embellishing its phenomenal record of increasing its annual pay-out by at least 5% for every year since 1980.

“Such consistency is evidence that the firm offers much that is ideal from an investment perspective: the mandatory nature of investment in its products, owing to health and safety regulations and concerns, creates consistent business flows and sticky customers, a combination which provides a degree of pricing power. That in turn can mean high margins, good returns on capital, strong free cash flow and that consistent dividend growth record.

“The only tricky issue as the company makes it to the top flight is the shares’ valuation. A multiple of 30 times forward earnings is twice that of the FTSE 100 and such a rating leaves no margin for error, either at company or a wider market level.”

Going down….

Merlin Entertainments and Babcock International are the most likely victims of the next FTSE reshuffle, according to The Share Centre.

It said shares in Merlin Entertainments, the company behind Alton Towers have taken a big dip recently. He said this shows investors are concerned by the heightened threat of terrorism, along with the unfavourable weather conditions.

“The group has also recently ‘complained’ of the cost pressures brought about by employment legislation, particularly in the UK. Investors are likely to have also reacted negatively to disappointing forward looking guidance the group provided in October, as the expectation is now that like-for-like growth is likely to be in the low single digits. Merlin was hovering above the relegation places last quarter so it’s unsurprising to see it feature more prominently this time round,” he said.

Miah added that Babcock International is also in a prime position to be relegated from the FTSE 100. He said the performance of the group over the last year has been “disappointing on the back of concerns for support service providers, which was notably highlighted by the problems at Carillion”.

“The group tried to reassure investors in a trading update last week by reporting increases in revenues and pre-tax profit in the first half. However, it appears as though it was a failed bid as the shares retreated as a result indicating that concerns remain over its growth targets for next year and continued pressure on the sector as a result of Brexit and contract delays.”